IMF Adjusts Its Policy on Arrears to Official Creditors

Changing official creditor landscape highlights need for IMF policy update

New policy can provide IMF financing to sovereign debtors in arrears

Reform will benefit creditors, debtors, and the international financial system more broadly

The new policy, approved on December 8, would allow the IMF, in certain carefully defined circumstances, to provide financing to a country even when it has outstanding arrears to official bilateral creditors. This reform should help promote more efficient resolution of sovereign debt crises in the future.

As a general rule, the IMF encourages all countries to maintain sound finances and does not condone payments arrears (i.e., where a country gets behind on its debt obligations). Indeed, until now, the IMF’s policy barred it from providing financing to a country that was in arrears to official bilateral creditors. This was the general policy except in two circumstances: where a restructuring agreement in the Paris Club (a longstanding forum of official bilateral creditors) exists—in which case all other creditors were assumed to restructure their claims on similar terms; or, where in the absence of such an agreement, each creditor provided its consent.

However, as IMF staff had highlighted in a May 2013 paper, this policy could, in some circumstances, allow an official bilateral creditor to block IMF assistance to a debtor country by refusing to participate in a restructuring. This could result in bigger losses for all creditors and damage to the international financial system. The 2013 staff paper had also pointed out that reliance on Paris Club processes could give rise to unfairness in cases where the Paris Club only accounted for a minority of the official claims on a particular country.

The need for this new policy, therefore, has been evident for some time now. In the following interview, Sean Hagan, the IMF’s General Counsel, and Hugh Bredenkamp, Deputy Director of the IMF’s Strategy, Policy, and Review Department, talk to the IMF Survey about the new reform and what it means.

IMF Survey : What motivates this reform?

Bredenkamp: There were two main issues to address. The first relates to the IMF’s exclusive reliance on the processes and practices of the Paris Club when it is considering financial support to a country that is in arrears to its official creditors. This approach worked well in a context where the Paris Club creditors accounted for the bulk of official financing.

However, over the...